Millions of workers will pay more tax on their earnings from today as higher National Insurance comes into effect to help plug a gap in social care funding.
National Insurance payments are increasing by 1.25 percentage points from April 6, up from 12% to 13.25%.
The increase is being introduced despite pressure for it to be suspended due to wider cost of living pressures - with energy, fuel and food bills all rising.
At the moment, you pay National Insurance on earnings above £9,568 a year but the threshold for when you start paying is rising to £9,880.
However, changes in the Spring Statement mean fewer people will be subject to the tax from July 6, when the threshold for who has to pay it will rise to £12,570.
The April increase will leave most workers at least £200 worse off, but from July, the Treasury estimates it will save the “typical employee” around £330 a year.
Is the tax increase justified? Let us know in the comments below
A person working full time on minimum wage earns nearly £20,000. They currently pay £1,252 a year in National Insurance.
The previously announced 1.25% rise means those on the minimum wage would have paid an extra £89 per year, bringing their total NI payments to £1,341.
The Spring Statement decision to raise the threshold at which people pay National Insurance means those on the minimum wage will now pay £267 less in NI than they did last year.
The government says 70% of those who pay National Insurance will pay less from July, while 2.2million people will pay nothing at all.
For earnings above £50,270, the rate at which you pay National Insurance is rising 1.25 percentage points today to 3.25%, up from 2%.
Employers also pay National Insurance - and that rate is going up by 1.25 percentage points too.
The new tax levy is also designed to help make social care more affordable.
The government says that its policy will mean £39billion being invested in health and social care over the next three years.
Lifetime care costs will be capped at £86,000 from October next year.
Chancellor Rishi Sunak said: "This government will not shy away from the difficult decisions we need to take to fix our social care system and slash NHS waiting times."
The Conservative 2019 election manifesto pledged "not to raise the rates of income tax, national insurance or VAT" but it has been argued that the promise was made before the pandemic.
The Office for Budget Responsibility (OBR) now forecasts that the overall tax burden as a proportion of GDP will by 2026/27 rise to its highest level since the late 1940s.
Will you pay more or less in National Insurance?
The Institute for Fiscal Studies (IFS) calculates that, taking the rate hike and threshold increase together, it will mean a fall in the National Insurance bill for those earning less than £35,000 for the 2022/23 tax year compared to the previous year.
Those earning more than £35,000 will pay more, the IFS calculates.
MoneySavingExpert founder Martin Lewis explains: ""If you're under that [amount], this is a gain, if you're over that [amount], then the two measures are a loss for you,” he said in a video posted to Twitter.
Martin added: "Effectively the way it works on earnings is from over around £9,600, all the way up to around £35,000, you will either not pay any more, or lower down [the pay scale], will pay less National Insurance than currently.
"If you earn £35,000 or more then the 1.25 percentage point increase outweighs the change in the starting threshold, so you will pay more National Insurance."
How much more or less you will pay in National Insurance depends on your current salary.
Someone earning £30,000 a year currently pays £204 a month in National Insurance contributions.
This will rise to £222 a month from April when the 1.25 percentage point increase comes in, but in July - when the threshold increases for a second time - they will start paying £192
For someone earning £100,000 a year, they currently pay £490 a month in National Insurance.
But from April this will go up to £581 a month, before falling to £551 a month in July.
Here is how your National Insurance is changing, according to figures from the Institute For Fiscal Studies:
- £20,000 annual pay: NIC now - £104; NIC from April 6 - £112; NIC from July 6 - £82
- £30,000 annual pay: NIC now - £204; NIC from April 6 - £222; NIC from July 6 - £192
£40,000 annual pay: NIC now - £304; NIC from April 6 - £333; NIC from July 6 - £303
£50,000 annual pay: NIC now - £404; NIC from April 6 - £443; NIC from July 6 - £413
£60,000 annual pay: NIC now - £423; NIC from April 6 - £472; NIC from July 6 - £443
£70,000 annual pay: NIC now - £440; NIC from April 6 - £499; NIC from July 6 - £470
£80,000 annual pay: NIC now - £457; NIC from April 6 - £526; NIC from July 6 - £497
£90,000 annual pay: NIC now - £473; NIC from April 6 - £554; NIC from July 6 - £524
£100,000 annual pay: NIC now - £490; NIC from April 6 - £581; NIC from July 6 - £551
National Insurance is a tax on earnings, paid by both employed and self-employed workers. It allows workers to qualify for certain benefits and the state pension.
You pay mandatory National Insurance if you’re 16 or over and are either an employee earning above £184 a week, or self-employed and making a profit of £6,515 or more a year.
Once you reach state pension age, you no longer need to keep paying National Insurance.
If you have an employer, or you're self-employed but work for an employer, you'll pay Class 1 National Insurance contributions.
The amount you pay on National Insurance is then worked out based on your on gross earnings, before tax or pension deductions, above certain thresholds.
Is there anything I can do to lower my tax bill?
If your company offers a salary sacrifice scheme for pension contributions, then you can slash your National Insurance bill by paying more into your pension.
Salary sacrifice schemes effectively cut your salary, and pay money into your pension, which is free of both income tax and national insurance. You can use it to pay for childcare, for example.
It in turn also gives your retirement stash a boost so you have more money in later life.
The idea is that by giving up a portion of your salary, the amount you get paid is reduced – which decreases the amount of income tax and National Insurance you pay.
Keep in mind, as the name suggests, you will effectively be reducing your monthly pay - but in some cases, it can make financial sense.
